CanaCCord Capital inc.

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1 Q1 Canaccord Capital Inc. first quarter fiscal 2007 report to sh a r eholders CANACCORD CAPITAL INC. IMPLEMENTS MANAGEMENT TRANSITION AND POSTS RECORD FIRST QUARTER FISCAL 2007 RESULTS Peter Brown, Chairman & CEO, announces Paul Reynolds as President and Mark Maybank as COO; Record first quarter revenue up 108.2% with net income up 134.2%. (All dollar amounts are stated in Canadian dollars unless otherwise indicated) VANCOUVER, August 4, 2006 Peter M. Brown, the Chairman of the Board & Chief Executive Officer of Canaccord Capital Inc. (TSX & AIM: CCI) ( CCI or the Company ) announced today the Board has appointed Paul Reynolds as President and Mark Maybank as Chief Operating Officer of Canaccord Capital Inc. In addition, Peter Brown announced the resignation of Michael G. Greenwood as Director and President & Chief Operating Officer of CCI. Paul Reynolds remains a director of CCI and Global Head of Canaccord Adams and, for regulatory purposes, President & Chief Operating Officer of Canaccord Adams Limited (CCI s UK operating subsidiary). Mark Maybank continues as Deputy Head of Canaccord Adams and Global Head of Research & Operations. In addition, Mark Maybank has been nominated as the President & Chief Operating Officer of Canaccord Capital Corporation (the Company s Canadian operating subsidiary), subject to regulatory approval. I am confident in Paul s and Mark s abilities to take on the reigns of these key leadership roles, and to carry forward Canaccord s entrepreneurial, consensus-driven culture, said Peter Brown. We are fortunate to have a deep, diverse, global pool of talent that has allowed us to develop the next generation of leadership internally and I look forward to working with Paul and Mark to continue our tradition of generating sustainable growth. To support the transition period, Michael Greenwood has entered into a twelve-month consulting arrangement with Canaccord. Peter Brown stated, Mike leaves a great many friends behind at Canaccord, and his strategic leadership and contribution to our growth over the last 14 years has been integral to our success. We wish him every success in the future. Also, he added On a personal note, I, more than anyone else in the company, have worked with Mike on a daily basis and I will miss the benefit of his forward thinking, dedication and drive for perfection in every area of our business. CCI s Fiscal Q1/07 Results Canaccord Capital Inc. announced that revenue for its first quarter of fiscal 2007, ended June 30, 2006, was a first quarter record of $206.1 million, up $107.1 million, or 108.2%, from $99.0 million for the same period a year ago. Net income of $25.9 million was also a first quarter record, up $14.9 million, or 134.2%, from $11.1 million for the first quarter of fiscal 2006, and diluted earnings per share (EPS) were a first quarter record of $0.54, up $0.30, or 125.0%, from $0.24 for the same period a year ago. Strong global markets for the first part of the quarter played a significant role in our record first quarter results, added Brad Kotush, Executive VP & CFO. We are proud of the hard work and client focus demonstrated by all of our partners. contents 1 Canaccord Reports Record Q1 Results 3 Message from the Chairman & CEO 5 Management s Discussion and Analysis 19 Interim Consolidated Balance Sheets 20 Interim Consolidated Statements of Operations and Retained Earnings 21 Interim Consolidated Statements of Cash Flows 22 Notes to Interim Consolidated Financial Statements

2 REPORT TO SHAREHOLDERS Highlights of the first quarter fiscal 2007 results (three months ended June 30, 2006) compared to the first quarter fiscal 2006 results (three months ended June 30, 2005): Revenue of $206.1 million, up 108.2%, or $107.1 million, from $99.0 million Expenses of $167.0 million, up 99.7%, or $83.4 million, from $83.6 million Net income of $25.9 million, up 134.2%, or $14.9 million, from $11.1 million Diluted EPS of $0.54, up 125.0%, or $0.30, from $0.24 Return on equity (ROE) of 34.7%, up from 19.8% Book value per common share at the period end increased to $6.51, up 32.6%, or $1.60, from $4.91 The Board approved a common share dividend of $0.08 per share on August 3, 2006, payable on September 8, 2006, with a record date of August 25, ,827,350 total issued common shares outstanding on a diluted basis as of August 3, 2006 Highlights of Operations: During Q1/07, our international capital markets team, Canaccord Adams, led the following equity transactions: $200 million in a TSX financing for Yamana Gold Inc. (TSX: YRI) $178 million in an AIM placing for European Nickel plc (AIM: ENK) $175 million in a bought deal for First Calgary Petroleums Ltd. (TSX: FCP/AIM: FPL) $125 million in a TSX financing for Corriente Resources Inc. (TSX: CTQ) $55 million in a bought deal for Royal Laser Corp. (TSX: RLC) $30 million in a TSX firm commitment for Westfield Real Estate Investment Trust (TSX: WFD.DB.C) Revenue from Private Client Services business increased by 82.4% over the same period a year ago to $72.3 million from $39.6 million. During Q1/07, we experienced growth in market share in our Canadian trading operations. Canaccord s market share was 3.83% in terms of TSX-traded volume, up from 3.32% for the same period a year ago. Canaccord ranked 4 th in Thomson Financial s Canada equity & equity-related league table (January to June 2006), raising US$951.3 million in proceeds for our clients serving as bookrunner on 15 deals above all other independents. Canaccord also ranked 2nd in the Canada Secondary Offerings category, up from 6th place last year. Our liquidity remains strong as working capital increased by 18.7% from $208.4 million a year ago, to $247.3 million. Annual General Meeting: The Annual General Meeting of shareholders will be held on Friday, August 4, 2006, at 2:00 p.m. (Pacific Time [PDT]) at the Four Seasons Hotel, 791 West Georgia Street, Vancouver, BC, Canada. The Annual General Meeting will also be simultaneously broadcast through a live Internet Webcast on August 4, This Webcast will be archived for viewing after the event. Please visit the Webcast events page at for more information and a direct link. _

3 message from the chairman & CEO This past quarter was a period of significant volatility for the broader capital markets. Strength in the first half of the quarter was followed by sharp swings in value of global indices and commodity prices. Even with these challenges, Q1 of fiscal 2007 was our second most successful quarter in the firm s history and a record first quarter. This performance comes on the heels of our record financial performance in fiscal Revenue of $206.1 million and net income of $25.9 million represents triple-digit revenue growth of 108.2%, net income growth of 134.2% and diluted EPS growth of 125.0% relative to Q1 of last year. Our achievements in Q1/07 demonstrate the strength provided by our different business lines and our geographical diversity. Our Culture of Ideas supported by Management Transition We credit our success to our idea-driven culture, and are proud that Canaccord is an environment that demands contribution and facilitates success for all our partners. Our client focus is evident in every area of our business. The global structure of our management team is designed to maintain and enhance this culture and further our growth, improve our client service and create value for our shareholders. We are fortunate to have a deep, diverse, global pool of talent that has allowed us to develop the next generation of leadership internally, in line with our values and goals. The leaders that are stepping forward share all of our common goals and values. Paul Reynolds and Mark Maybank have made significant contributions to Canaccord s growth and proven their ability to lead a global investment firm. Working with the rest of our management team, they will continue to execute our business plan in a consensus-based, idea-driven environment. Unfortunately, Mike Greenwood, upon reflection, has decided that this is a good time to resign his role as Director, President & Chief Operating Officer of Canaccord Capital Inc. to pursue other interests. Mike joined Canaccord in 1992 and shared with me the vision to convert a West Coast transaction firm into Canada s largest independent full service investment dealer with important international operations. Since that first vision, Mike has played an integral role in our achievements and has led many of the key initiatives that helped develop the great firm we are today. Mike leaves a great many friends behind at Canaccord, and his strategic leadership and contribution to our growth over the last 14 years has been integral to our success. We wish him every success in the future. On a personal note, I, more than anyone else in the company, have worked with Mike on a daily basis and I will miss the benefit of his forward thinking, dedication and drive for perfection in every area of our business. Among our core values, we remain committed to a continued high level of employee ownership of the firm. During fiscal 2007, we will consider a variety of different programs designed to maintain the high level of employee ownership in the firm. Canaccord Adams leverages its global platform Canaccord Adams consolidated revenue increased 129.7%, from $54.5 million in Q1/06, to $125.1 million in Q1/07. Broken down geographically, revenue in the UK increased 114.1%, from $22.8 million to $48.9 million; revenue in Canada increased 69.5%, from $31.6 million to $53.6 million; and revenue in the US was $22.6 million reflecting the contribution from our recent acquisition. Much of this growth was driven by higher market share in Canada and the UK as well as increased overall capital markets activity year over year. Canaccord Adams was ranked fourth in lead underwritings by Thomson Financial in its Canadian equity and equity-related statistics. Significantly, market share in terms of proceeds raised from Canadian transactions increased to 7.8% for the six months ended June 30, 2006, up from 4.1% for the same period in Operating highlights include leading a $200 million equity offering on the TSX for Yamana Gold Inc. We also led a $178 million placement for European Nickel plc on AIM and a $175 million bought deal for First Calgary Petroleums Ltd. Although resource sector transactions revenue was relatively high, 64.7% of our total transactions this quarter were for non-resource companies, demonstrating our sector diversity despite a commodities boom. An example of this diversity and focus on balance is that we are breaking new ground in the creation and development of innovative small- to mid-cap Canadian REITs. We continue to make solid progress integrating our new US group since the close of our acquisition of Adams Harkness Financial Group, Inc. in January. The development and evolution of our US operation is focused on adding talented professionals to our existing team, broadening our capabilities, and providing our clients with superior, money-making ideas. _3

4 message from the chairman & CEO To support this plan, we will continue to expand our San Francisco-based technology practice, and further diversify our sector mix in the US through the expansion of our current energy practice in Houston, as well as building out our New York facilities in order to solidify our growing presence in a key US financial centre. Growth in Assets Supports Private Client Services Revenue Growth Private Client Services revenue for the quarter was $72.3 million, up 82.4% from a year ago. This increase is due to both market share gains as well as strong activity in the North American equity markets. Our assets under management (AUM) were $649 million, experiencing growth of 58.3% year over year. Despite tougher markets during May and June, AUM increased by 5.9% from March 31, Assets under administration (AUA) were up 40.1% to $13.9 billion from last year, and were down 2.6% from March 31, 2006 versus the S&P/TSX index decline of 4.1% during fiscal Q1. Year-over-year AUA growth reflects market value increases in North American equity markets, asset transfers with new Investment Advisors (IA) and additional assets added to our existing client accounts. As at June 30, 2006, there were 430 IAs, a net increase of 12 from a year ago. We continue to improve the products and services we offer to our private clients. To this end, in July 2006 we added Connor, Clark & Lunn Financial Group and Dixon Mitchell Investment Counsel Inc. to our Alliance program, bringing the total to six portfolio managers. Additional high value managers will be added to our managed accounts platform as we find appropriate firms with which to partner. Outlook for the Remainder of Fiscal 2007 Our business is cyclical and, as such, revenue and net income vary from quarter to quarter and year to year. Normally, Canaccord experiences the traditional seasonal fluctuations of the financial industry with the first half of each fiscal year contributing approximately 35% to 40% of our annual revenue. While the capital markets performed better during the first quarter of fiscal 2007, compared to the same quarter in previous years, we expect the remaining quarters of this year to reflect historical seasonality patterns. Capital markets globally experienced a sharp drop in performance in May, which has continued into the summer, and we expect Q2/07 performance to be more in line with previous fiscal second quarters. We would like to congratulate and thank our employees and partners for their continued commitment and dedication. These contributions enable Canaccord to successfully continue with carrying out our long term strategy. We look forward to discussing our progress with you over the remaining quarters of this year. Peter M. Brown ch a ir m a n & chief e x ecu t i v e officer 4_

5 management s discussion and analysis First quarter fiscal 2007 for the three months ended June 30, this document is dated August 4, The following discussion of the financial condition and results of operations for Canaccord Capital Inc. (Canaccord) is provided to enable the reader to assess material changes in such condition and results for the three-month period ended June 30, 2006, compared to the corresponding period in the preceding fiscal year, with an emphasis on the most recent three-month period. Canaccord s fiscal year end is March 31. Canaccord s first quarter fiscal 2007 was the three-month period ended June 30, 2006, and is also referred to as first quarter 2007 and as Q1/07 in the following discussion. This discussion should be read in conjunction with the unaudited interim consolidated financial statements for the three-month period ended June 30, 2006, beginning on page 19 of this report, the 2006 annual Management s Discussion and Analysis (MD&A), our Annual Information Form dated June 26, 2006, and the audited consolidated financial statements for the fiscal year ended March 31, 2006, in Canaccord s Annual Report dated June 26, 2006 (the Annual Report). There has been no material change to the information contained in the annual MD&A for fiscal 2006 except as disclosed in this MD&A. Canaccord s financial information is expressed in Canadian dollars unless otherwise specified. This document is prepared in accordance with Canadian generally accepted accounting principles (GAAP) with reconciliation to international financial reporting standards (IFRS). All the financial data below is unaudited except for the full fiscal year 2006 data. Caution regarding forward-looking statements This document may contain certain forward-looking statements. These statements relate to future events or future performance and reflect management s expectations or beliefs regarding future events including business and economic conditions and Canaccord s growth, results of operations, performance and business prospects and opportunities. Such forward-looking statements reflect management s current beliefs and are based on information currently available to management. In some cases, forward-looking statements can be identified by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential, continue, target, intend or the negative of these terms or other comparable terminology. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and a number of factors could cause actual events or results to differ materially from the results discussed in the forward-looking statements. In evaluating these statements, readers should specifically consider various factors which may cause actual results to differ materially from any forward-looking statement. These factors include, but are not limited to, market and general economic conditions, the nature of the financial services industry and the risks and uncertainties detailed from time to time in Canaccord s interim and annual consolidated financial statements and its Annual Report and Annual Information Form filed on These forward-looking statements are made as of the date of this document, and Canaccord assumes no obligation to update or revise them to reflect new events or circumstances. Non-GAAP measures Certain non-gaap measures are utilized by Canaccord as measures of financial performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Canaccord s capital is represented by common shareholders equity and, therefore, management uses return on average common equity (ROE) as a performance measure. Assets under administration (AUA) and assets under management (AUM) are non-gaap measures of client assets that are common to the wealth management aspects of the private client services industry. AUA is the market value of client assets administered by Canaccord in respect of which Canaccord earns commissions or fees. This measure includes funds held in client accounts as well as the aggregate market value of long and short security positions. Canaccord s method of calculating AUA may differ from the methods used by other companies and therefore may not be comparable to other companies. Management uses this measure to assess operational performance of the Private Client Services business segment. AUM is the market value of assets that are beneficially owned by clients and are discretionarily managed by Canaccord as part of our Independence Accounts program. Services provided include the selection of investments and the provision of investment advice. AUM are also administered by Canaccord and are included in AUA. _5

6 MANAGEMENT S DISCUSSION and ANALYSIS Overview Business environment Canaccord s business is cyclical and experiences considerable variations in revenue and income from quarter to quarter and year to year due to factors beyond Canaccord s control and, accordingly, revenue and net income are expected to fluctuate as they have historically. Our business is subject to the overall condition of the North American and the European equity markets, including the seasonal variance in these markets. In general, North American capital markets are slower during the first half of our fiscal year, during which we typically generate approximately 35% to 40% of our annual revenue. During the second half of our fiscal year, we typically generate 60% to 65% of our annual revenue. However, during the first quarter of fiscal 2007, global capital markets performed better compared to the same quarter in previous years. Capital markets activity dropped sharply in late May with no significant improvement to date. We expect, therefore, that fiscal Q2/07 performance will be more reflective of our historical seasonality pattern. We continue, however, to have a pipeline of potential transactions available for completion subject to market activity improvement. We expect that Japan s efforts to normalize its economy will have a net effect of causing a rise in global interest rates, resulting in slower economic growth on a global scale. This effect has started to be felt in the US as its growth slowed to 3.5% in the second quarter of calendar 2006, in response to past monetary tightening, a cooling housing market, and the expectation of further interest rate increases in the second half of Similarly, growth in Canada levelled off at 3.3%, and Canadian capital markets experienced a considerable drop in activity in May 2006 as measured by the volume of equity traded. For the second half of calendar 2006, the Canadian dollar may continue its rise against the US dollar, therefore challenging exports and affecting our net trading balance. As a result, Canadian interest rates remained stable in July and further increases are expected to be limited. European confidence levels plunged in June as inflation and interest rates continued to rise. Economic activity in Europe slowed considerably during fiscal Q1/07, which is expected to continue in Q2 of fiscal Household expenditure is still lacking solid support from labour market fundamentals and is expected to rise by only 0.5% by the end of Q3 calendar About Canaccord s operations Canaccord Capital Inc. s operations are divided into three segments: The first two, Private Client Services and Canaccord Adams, are principally operating segments, while the third, Other, is mainly an administrative segment. Private Client Services provides brokerage services and investment advice to retail or private clients primarily in Canada, and to a lesser degree, in the US and internationally. Canaccord Adams (formerly known as Canaccord s Global Capital Markets) includes investment banking, research and trading activities on behalf of corporate, institutional and government clients as well as principal trading activities in Canada, the UK and the US. Canaccord acquired 100% of Adams Harkness Financial Group, Inc. (engaged primarily in capital markets activities in the US), on January 3, As a result of this acquisition, the Adams Harkness Financial Group, Inc. s operating subsidiary was renamed Canaccord Adams Inc. and Canaccord s Global Capital Markets (Canada, UK and US) was re-branded globally as Canaccord Adams. Canaccord Adams Inc. together with Canaccord Capital Corporation (USA), Inc., which includes US Private Client Services and Other operations in the US, constitute Canaccord s US geographic segment. In addition, Canaccord Adams Limited (engaged in capital markets activities in the United Kingdom) constitutes Canaccord s UK geographic segment. The division of Canaccord Capital Corporation, our principal Canadian operating subsidiary, that is engaged in capital markets activities in Canada was branded as Canaccord Adams, and together with Canadian Private Client Services and Other operations, they constitute Canaccord s Canadian geographic segment. Other includes correspondent brokerage services, interest and foreign exchange revenue and expenses not specifically allocable to Private Client Services and Canaccord Adams. 6_

7 MANAGEMENT S DISCUSSION and ANALYSIS Consolidated operating results First quarter fiscal 2007 summary data (1) Three months ended June 30 Year-over-year C$ thousands, except per share, employee and % amounts) increase Canaccord Capital Inc. Revenue (2) Commission $ 78,054 $ 40, % Investment banking 102,840 49, % Principal trading 7,784 (1,741) n.m. Interest 13,638 8, % Other 3,811 2, % Total Revenue $ 206,127 $ 99, % Expenses Incentive compensation $ 104,955 $ 48, % Salaries and benefits 12,493 9, % Other overhead expenses (3) 49,504 25, % Total Expenses $ 166,952 $ 83, % Income before income taxes 39,175 15, % Net income 25,942 11, % Earnings per share (EPS) diluted % Return on average common equity (ROE) 34.7% 19.8% 14.9p.p. Book value per share period end $ 6.51 $ % Number of employees 1,534 1, % US geographic segment (4) Revenue $ 23,985 n.m. Expenses n.m. Incentive compensation 12,902 n.m. Salaries and benefits 1,754 n.m. Other overhead expenses (3) 7,141 n.m. Total Expenses $ 21,797 n.m. Income before income taxes 2,188 n.m. Net income 1,648 n.m. Canaccord Capital Inc., excluding US geographic segment Revenue $ 182,142 $ 99, % Expenses Incentive compensation $ 92,053 $ 48, % Salaries and benefits 10,739 9, % Other overhead expenses (3) 42,363 25, % Total Expenses $ 145,155 $ 83, % Income before income taxes 36,987 15, % Net income 24,294 11, % (1) Some of this data is considered to be non-ga AP. (2) To enhance our disclosure and to facilitate comparison with other companies in the industry, consolidated revenue has been changed from revenue by business segment to revenue by activity. For revenue by business segment information, please refer to the Results of Operations section on page 11. (3) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative, amortization, development costs and gain on disposal of investment. (4) Starting on January 3, 2006, revenues and expenses for Canaccord Capital Corporation (USA), Inc. and Canaccord Adams Inc. are disclosed together under the US geographic segment. Therefore, US geographic segment results are not to be interpreted as generated exclusively from Canaccord Adams Inc. or as a result of the acquisition of Adams Harkness Financial Group, Inc. n.m.: not meaningful p.p.: percentage points _7

8 MANAGEMENT S DISCUSSION and ANALYSIS Geographic distribution of revenue for first quarter fiscal 2007 Three months ended June 30 Year-over-year (C$ thousands, except % amount) increase Canada (1) $ 133,250 $ 76, % UK (2) 48,892 22, % US (3) 23,985 n.m. (1) Canada geographic segment includes operations for Private Client Services, Canaccord Adams (a division of Canaccord Capital Corporation) and Other business segments. (2) UK geographic segment includes operations for Canaccord Adams Limited. (3) Commencing on January 3, 2006, as a result of the acquisition of Adams Harkness Financial Group, Inc., the US geographic segment includes operations for Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc., which also includes operations from Private Client Services and Other business segments in the US. n.m.: not meaningful Three-month summary Revenue was a first quarter record of $206.1 million, up $107.1 million, or 108.2%, compared to the same period a year ago. Revenue increased across all lines of business due to Canaccord s higher market share in its key Canadian and UK market sectors, which also experienced higher activity during the quarter compared to the same period a year ago. Also, the momentum from our growth initiatives and expanded sector participation created during Q4/06 contributed to the increase in revenue during Q1/07. On a consolidated basis, revenue is generated through five activities: commissions, investment banking, principal trading, interest, and other. Overall, first quarter fiscal 2007 revenue would have been $182.1 million, up $83.1 million, or 84.0%, compared to first quarter fiscal 2006, excluding the contribution of the US geographic segment (see footnote (4) of first quarter fiscal 2007 summary data table on page 7). Revenue generated from commissions for the first quarter of fiscal 2007 was $78.1 million, up $37.2 million, or 91.3%, from the same period a year ago, in part due to higher transaction volumes, growth in client assets, improved market share in Canada, and the addition of Canaccord Adams Inc. in the US. Investment banking revenue was $102.8 million, up $53.3 million, or 107.7%, mainly due to greater contributions from larger financing transactions, including secondary offerings, private placements, and initial public offerings; an increase in proceeds from the sale of fee shares received as compensation for investment banking transactions; and the added contribution of Canaccord Adams Inc. in the US. Revenue derived from principal trading activity was $7.8 million, up $9.5 million, compared to a loss of $1.7 million in Q1/06 mainly due to favourable market conditions and increased activity in Canaccord Adams. In addition to traditional sales and trading activities for clients, Canaccord Adams trades as principal and is a market maker for a number of equity securities. Interest revenue was $13.6 million, up $5.4 million, or 65.4%, mainly due to an increase in the number and size of margin accounts and the increase in interest rates in Canada since Q1/06. Other revenue was $3.8 million, up $1.6 million, or 73.3%, mainly due to increases in foreign exchange gains. First quarter revenue in Canada increased to $133.3 million, up $57.1 million, or 74.9%, from a year ago, reflecting increased market share in corporate finance and trading that benefited from the robust market activity in Canadian equity markets, largely due to rising global demand for commodities and related equities. Similarly, revenue in the UK increased to $48.9 million, up $26.1 million, or 114.1%, as the result of Canaccord s leading market share on AIM, which benefited from high levels of activity, resulting in increased corporate finance revenue. First quarter fiscal 2007 consolidated revenue in the US was $24.0 million and includes revenue generated by Canaccord Capital Corporation (USA), Inc. ($2.6 million) and Canaccord Adams Inc. ($21.4 million), as a result of the acquisition of Adams Harkness Financial Group, Inc., on January 3, Consequently, our US operations became a reportable segment for the first time in Q4/06. 8_

9 MANAGEMENT S DISCUSSION and ANALYSIS Expenses as a percentage of revenue Three months ended June 30 Year-over-year increase Increase (decrease) in percentage points (decrease) Incentive compensation 50.9% 49.1% 1.8p.p. Salaries and benefits 6.1% 9.3% (3.2)p.p. Other overhead expenses (1) 24.0% 26.0% (2.0)p.p. Total 81.0% 84.4% (3.4)p.p. (1) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative, amortization, development costs and gain on disposal of investment. p.p.: percentage points Expenses were $167.0 million, up $83.4 million, or 99.7%, from a year ago. In addition to the $21.8 million of expenses incurred by the US geographic segment, the overall increase is largely due to a rise in incentive compensation, trading costs, and general and administrative expense, which collectively increased at a slower pace than revenue. During Q1/06, Canaccord realized a one time pre-tax gain of $1.6 million from the disposal of an investment in the Bourse de Montréal. Had Canaccord not realized such gain in Q1/06, the expense to revenue ratio would have been 86.1% compared to 81.0% for Q1/07. Overall, first quarter fiscal 2007 expenses would have been $145.2 million, up $61.6 million, or 73.7%, compared to Q1/06 excluding the expenses incurred by the US geographic segment. For the quarter, incentive compensation expense was $105.0 million, up $56.3 million, or 115.7%, largely due to the increase in fiscal first quarter revenue posted by the Private Client Services and Canaccord Adams divisions. However, incentive compensation as a percentage of revenue increased to 50.9% compared to 49.1% for the same quarter a year ago. Investment Advisors are individually earning higher revenue and are therefore receiving higher payouts that are based on a sliding revenue scale. Compensation expense includes a 3% National Health Insurance (NHI) tax applicable for UK-based employees. Salaries and benefits expense increased by $3.3 million for the first quarter of fiscal 2007, compared to the same quarter a year ago due to our increased levels of activity and the addition of salaries and benefits expenses associated with Canaccord Adams Inc. in the US. The total compensation payout as a percentage of consolidated revenue for Q1/07 was 57.0%, down from 58.5% in Q1/06 due to the leverage achieved from our fixed level of salaries and benefits expense. Other overhead expenses Three months ended June 30 Year-over-year (C$ thousands, except % amount) increase Trading costs $ 8,559 $ 4, % Premises and equipment 5,937 3, % Communication and technology 5,063 3, % Interest 4,982 2, % General and administrative 19,107 10, % Amortization 1,989 1, % Development costs 3,867 2, % Gain on disposal of investment (1,633) n.m. Total other overhead expenses $ 49,504 $ 25, % n.m.: not meaningful Other overhead expenses increased by $23.8 million for the first quarter of fiscal 2007, compared to the same quarter a year ago. This increase is largely attributable to the increase in trading costs, up $4.2 million mainly due to the increase in activity in our commission revenue and the contribution associated with our new US platform; interest, up by $2.5 million due to higher interest rates compared to Q1/06; and general and administrative expense, up $9.1 million. _9

10 MANAGEMENT S DISCUSSION and ANALYSIS General and administrative expense was $19.1 million, up $9.1 million, or 90.8%, from a year ago partly due to the increase in business activity during the quarter, and the addition of Adams Harkness in Q4/06. The largest increases in general and administrative expense were in reserves, up $1.1 million related to increased trading activity; promotion and travel, up $3.1 million, largely attributable to the increase in the geographic span of our business; and client expenses, up $1.3 million, reflecting an increased provision related to client activity. Development costs Three months ended June 30 Year-over-year (C$ thousands, except % amounts) increase Hiring incentives $ 2,698 $ 1, % Systems development 1,169 1, % Total $ 3,867 $ 2, % Development costs are also included as a component of other overhead expenses and include hiring incentives and systems development costs. Hiring incentives are one of our tools to recruit new Investment Advisors (IAs) and capital markets professionals. The increase in hiring incentives in Q1/07 is mainly due to the costs associated with the hiring of Private Client Services employees in Canada and the costs associated with retaining Adams Harkness employees. Systems development costs are expenditures that Canaccord has made related to enhancing its information technology platform. Overall hiring incentives increased by $1.7 million from a year ago. Private Client Services Q1 fiscal 2007 hiring incentives were $1.5 million, up $0.7 million, compared to the same period a year ago. Similarly, hiring incentives for Canaccord Adams were $1.2 million, up $1.0 million. The increase in hiring incentives is due to the recruitment of professionals for both Private Client Services and Canaccord Adams, and the retention costs associated with Adams Harkness employees, as a result of the acquisition on January 3, Net income was a first quarter record of $25.9 million, up by $14.9 million, or 134.2%, from a year ago. Diluted EPS was $0.54, up by $0.30, or 125.0%, and ROE was 34.7% compared to a ROE of 19.8% a year ago. The lower increase in EPS and ROE compared to the increase in net income is partially associated with the issuance of 691,940 shares under the incentive plan for recruiting purposes and the issuance of 1,420,342 common shares in connection with acquisitions during fiscal Book value per common share increased by 32.6% to $6.51, up $1.60 from $4.91 a year ago, reflecting an increase in retained earnings and share capital. The US geographic segment generated quarterly net income of $1.6 million, equivalent to 6.4% of Canaccord s overall net income of $25.9 million. Income taxes were $13.2 million for the quarter, reflecting an effective tax rate of 33.8% compared to 28.2% a year ago. The increase in the effective tax rate in Q1/07 relative to Q1/06 is related to the geographical composition of Canaccord s net income and the preferential tax treatment a year ago due to the capital gain from the disposal of an investment in the Bourse de Montréal. Had Canaccord not realized such gain, the effective tax rate in Q1/06 would have been 30.1%. Our effective tax rate will vary depending on the geographic composition of our operating activities. 10_

11 MANAGEMENT S DISCUSSION and ANALYSIS results of operations Private Client Services Three months ended June 30 (C$ thousands, except assets under administration and assets under management, Year-over-year which are in C$ millions, employees, Investment Advisors and % amounts) increase Revenue $ 72,286 $ 39, % Expenses Incentive compensation 33,368 17, % Salaries and benefits 3,430 3, % Other overhead expenses 18,419 10, % Total Expenses $ 55,217 $ 31, % Income before income taxes 17,069 8, % Assets under management (AUM) % Assets under administration (AUA) 13,942 9, % Number of Investment Advisors (IAs) % Number of employees % Revenue from Private Client Services is generated through traditional commission-based brokerage services; the sale of fee-based products and services; client-related interest; and fees and commissions earned by IAs in respect to corporate finance and venture capital transactions by private clients. Three months ended June 30, 2006, compared with three months ended June 30, 2005 Revenue from Private Client Services was $72.3 million, up $32.7 million, or 82.4%, from a year ago due to strong activity in the North American equity markets, particularly in Canada within the resource sectors during the first two months of fiscal Q1/07. Parallel to this revenue growth was a $4.0 billion increase in assets under administration (AUA) to a total of $13.9 billion. The 40.1% increase in AUA since fiscal Q1/06 reflects the strong increase in market values in North American equity markets, the addition of assets through transfers with newly hired IAs and additional assets added to existing accounts since Q1/06. There were 430 IAs at the end of the first quarter of fiscal 2007, a net increase of 12 from a year ago in an extremely competitive recruiting environment. Fee-related revenue as a percentage of total Private Client Services revenue decreased 4.2 percentage points to 20.0% compared to the same period a year ago. Expenses for Q1/07 were $55.2 million, up $24.2 million, or 78.0%. The largest increases in expenses were recorded in incentive compensation expense, up $15.8 million, or 89.8%, due to the increase in revenue for the quarter. Other overhead expenses included interest, up $3.0 million, or 231.1%; and general and administrative expense, up $3.2 million, or 113.1%. The largest components of general and administrative expense were client expenses, up $1.3 million due to increased provisions related to client activity; promotion and travel, up $0.7 million, which was required to support the overall increase in business activity due to corporate expansion, and other expenses, up $1.1 million, pertaining to regulatory expenses. Income before income taxes for the quarter was $17.1 million, up 98.2% from the same period a year ago. _11

12 MANAGEMENT S DISCUSSION and ANALYSIS Canaccord Adams Three months ended June 30 Year-over-year (C$ thousands, except employees and % amounts) increase Canaccord Adams (1) Revenue $ 125,106 $ 54, % Expenses Incentive compensation 65,948 28, % Salaries and benefits 3,188 1, % Other overhead expenses 22,386 9, % Total Expenses $ 91,522 $ 39, % Income before income taxes 33,584 14, % Number of employees % US geographic segment (2) Revenue $ 22,625 $ n.m. Expenses n.m. Incentive compensation 12,303 n.m. Salaries and benefits 1,754 n.m. Other overhead expenses 7,144 n.m. Total Expenses $ 21,201 $ n.m. Income before income taxes 1,424 n.m. Number of employees 154 n.m. Canaccord Adams, excluding the US geographic segment Revenue $ 102,481 $ 54, % Expenses Incentive compensation 53,645 28, % Salaries and benefits 1,434 1, % Other overhead expenses 15,242 9, % Total Expenses $ 70,321 $ 39, % Income before income taxes 32,160 14, % Number of employees % (1) Includes the global capital markets division of Canaccord Capital Corporation in Canada; Canaccord Adams Limited in the UK; and Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc. in the US. (2) US geographic segment includes the operations of Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc. s capital markets activities only. n.m.: not meaningful Revenue in this business segment is generated from commissions and fees earned in connection with investment banking transactions and institutional sales and trading activity as well as trading gains and losses from Canaccord s principal and international trading operations. Contribution to Canaccord Adams revenue comes from three regions: Canada, the UK, and most recently, from the US through the acquisition of Adams Harkness Financial Group, Inc. Three months ended June 30, 2006, compared with three months ended June 30, 2005 Revenue from Canaccord Adams in Q1/07 was a quarterly record of $125.1 million, up $70.6 million, or 129.7%, compared to the same quarter a year ago due to increases in market share that also benefited from strong capital markets activity in Canada, the US, and the UK. Excluding the contribution of the US geographic segment, Q1/07 revenue would have been $102.5 million, up $48.0 million, or 88.2%, compared to Q1/06. Revenue from Canadian operations Canaccord Adams in Canada generated a fiscal first quarter record revenue of $53.6 million that was derived from four divisions: Capital Markets ($42.8 million, up $16.9 million, or 65.5%); International Trading ($7.4 million, up $4.0 million, or 115.6%); Registered Traders ($1.6 million, up $1.1 million, or 205.3%); and Fixed Income $1.8 million, same as Q1/06. The increase in this sector is primarily due to benefits from increased market share in corporate finance and trading as a result of an increase in market activity in the Canadian equity markets during Q1/07, largely due to rising global demand for commodities and Canadian equities. 12_

13 MANAGEMENT S DISCUSSION and ANALYSIS Revenue from UK operations Operations related to Canaccord Adams Limited in the UK include institutional sales and trading, corporate finance, and research teams. Revenue in this business was an all-time quarterly record of $48.9 million, up $26.1 million, or 114.1%, from Q1/06. This increase is a result of Canaccord Adams leadership position as a Nominated Advisor/Broker on AIM, increasing liquidity and international interest in that market, and the successful expansion of our global securities distribution platform. Revenue from US operations The US geographic segment s results reflect the contribution of Canaccord Capital Corporation (USA), Inc. and Canaccord Adams Inc. (formerly the operating subsidiary of Adams Harkness Financial Group, Inc., acquired on January 3, 2006). Operational results for this new geographic segment are being reported separately as of January 3, 2006, and therefore, have no fiscal Q1 historical data for comparative purposes. Q1/07 revenue for Canaccord Adams in the US was $22.6 million, representing 11.0% of Canaccord s total revenue. Expenses for Q1/07 were $91.5 million, up $52.1 million, or 131.9%. Excluding expenses from Canaccord Adams US geographic segment, expenses would have been $70.3 million, up $30.9 million, or 78.2%. The largest increases in noncompensation expenses were in trading costs, up $3.6 million, reflecting the addition of Canaccord Adams Inc.; general and administrative expense, up $4.8 million related to higher business activity; and hiring incentives, up $1.0 million, related to ongoing hiring costs and the retention costs associated with the acquisitions of Adams Harkness Financial Group, Inc. and Enermarket Solutions Ltd. The increase in incentive compensation for the quarter of $37.2 million, or 129.1%, is largely attributed to the 129.7% increase in revenue, which resulted in higher payouts for the period. Also contributing to this increase was the introduction of Canaccord s Employee Stock Incentive Plan (ESIP) in Q2/06, which was primarily offered to key Canaccord Adams employees. Salary and benefits expense for the quarter increased by 147.7% compared to a year ago, due to the fact that the US geographic segment added $1.4 million in new salaries and benefits for the quarter. For the quarter, the total compensation expense payout as a percentage of revenue was 55.3%, up 0.1 percentage points compared to 55.2% for the same period a year ago. The largest components of other non-compensation overhead expenses were general and administrative expenses, up $4.8 million; premises and equipment, up $1.7 million; and communication and technology, up $2.4 million related to expansion and upgrades of our premises globally. The largest increase in general and administrative expenses was promotion and travel, up $2.0 million, to support the overall increase in business activity due to corporate expansion. General and administrative expenses incurred by Canaccord Adams Inc. in the US were $2.1 million, or 24.1%, of Canaccord Adams overall general and administrative expenses. Excluding Canaccord Adams Inc. s operations in the US during Q1/07, general and administrative expenses for Canaccord Adams would have been $6.7 million, up $2.8 million, or 71.8%, compared to Q1/06. Income before income taxes for the quarter was $33.6 million, up $18.6 million, or 124.0%, compared to the same quarter a year ago. Other segment Three months ended June 30 Year-over-year (C$ thousands, except employees and % amounts) increase Revenue $ 8,735 $ 4, % Expenses Incentive compensation 5,639 2, % Salaries and benefits 5,875 4, % Other overhead expenses 8,699 5, % Total Expenses 20,213 13, % (Loss) before income taxes (11,478) (8,173) 40.4% Number of employees % The Other segment includes correspondent brokerage services, interest, foreign exchange revenue and expenses not specifically allocable to the Private Client Services and Canaccord Adams divisions. Also included in this segment are Canaccord s operations and support services, which are responsible for front and back office information technology systems, compliance and risk management, operations, finance, and all administrative functions. _13

14 MANAGEMENT S DISCUSSION and ANALYSIS Three months ended June 30, 2006, compared with three months ended June 30, 2005 Revenue for the three months ended June 30, 2006, was $8.7 million, up $3.8 million, or 77.2%, compared to the same quarter a year ago, and is primarily attributed to an increase in foreign exchange revenue, bank interest and security rebate revenue. Expenses for Q1/07 were $20.2 million, up $7.1 million, or 54.3%. The largest increases in expenses were recorded in incentive compensation, up $3.4 million; salaries and benefits, up $1.0 million; and general and administrative expense, up $1.1 million, mainly attributable to increases in promotion and travel, up $0.4 million. Loss before income taxes was $11.5 million in the first quarter of fiscal 2007, up $3.3 million, or 40.4%, compared to a loss of $8.2 million in the same quarter a year ago. This is mainly due to a one time pre-tax gain of $1.6 million from the disposal of an investment in the Bourse de Montréal in Q1/06. Had Canaccord not realized such gain in Q1/06, loss before income taxes in Q1/07 would have increased by $1.7 million, or 17.1%. Another contributing factor to the increase in loss is due to higher incentive compensation expenses related to higher profitability. Financial conditions Below are specific changes in selected balance sheet items. Accounts receivable Client security purchases are entered into either on a cash or margin basis. When securities are purchased on margin, Canaccord extends a loan to the client for the purchase of securities, using securities purchased and/or securities in the client s account as collateral. Therefore, the clients accounts receivable balance of $428.0 million may vary significantly on a day-to-day basis and is based on trading volumes and market activity. As at June 30, 2006, total accounts receivable were $1,154.5 million compared to $1,540.0 million as at March 31, Also included in total accounts receivable are receivables from brokers and investment dealers totalling $368.3 million; $306.6 million in RRSP cash balances held in trust; and other receivables totalling $51.5 million. Cash and cash equivalents Cash and cash equivalents were $377.0 million as of June 30, 2006, compared to $370.5 million as of March 31, Significant sources of cash include net income of $25.9 million and securities sold short of $72.8 million. Uses of cash include a decrease in accounts receivable of $388.1 million; a decrease in securities owned of $9.0 million; the payment of dividends of $3.8 million; income taxes payable of $6.9 million; and the decrease in accounts payable of $474.4 million. Call loans Loan facilities utilized by the company may vary significantly on a day-to-day basis and depend on securities trading activity. Amounts borrowed pursuant to these call loan facilities, at June 30, 2006, totalled $0.6 million. Off-balance sheet arrangements On June 30, 2006, Canaccord had an irrevocable standby letter of credit from one of its banks in the amount of $1.3 million as a rent guarantee for our leased premises in the UK. Canaccord Adams has also entered into irrevocable standby letters of credit from a financial institution totalling $1.6 million as rent guarantees for its leased premises in Boston, New York and San Francisco. As of June 30, 2006, the total outstanding balances were zero. Liquidity and capital resources Canaccord has a capital structure underpinned by shareholders equity, which is comprised of share capital, retained earnings and cumulative foreign currency translation adjustments. On June 30, 2006, cash and cash equivalents net of call loans were $376.4 million, up $10.6 million from $365.8 million as of March 31, During the first quarter fiscal 2007 ended June 30, 2006, financing activities used cash in the amount of $2.8 million, which was primarily due to payment of dividends of $3.8 million, and offset by a $1.0 million for the decrease in unvested common share purchase loans (1) related to Canaccord s ESIP and other stock plans. Investing activities used cash in the amount of $0.4 million for the purchase of equipment and leasehold improvement. A further reduction in cash of $1.1 million was attributed to the effect of foreign exchange on cash balances. Operating activities provided cash in the amount of $14.9 million, which was due to net changes in non-cash working capital items, net income and items not affecting cash. (1) These are forgivable loans granted to key employees in connection to the purchase of common stock in the open market under the ESIP and other incentive plans. 14_